What is the requirement for valid life insurance coverage?

Insurable interest is a fundamental concept in life insurance that requires the policyholder to have a legitimate interest in the continued life of the insured individual. This means that the policyholder would suffer financially or emotionally from the death or incapacitation of the insured. The presence of insurable interest is crucial because it helps prevent moral hazard, where someone could take out a policy on someone else's life without any real connection or reason, potentially leading to unethical situations.

For life insurance to be considered valid and enforceable, it is essential that insurable interest exists at the time the policy is issued. This requirement protects both the insurer and the insured by ensuring that the contracts are made for legitimate economic reasons, thereby maintaining the integrity of the insurance system.

While other options like renewable term insurance, group life insurance, and an incontestability clause play important roles in specific types of policies or under certain conditions, they do not meet the basic requirement that establishes a valid life insurance contract in terms of ethical standards and legal enforceability.